The Investment Analysis of Apple Company - Case Study Example

Apple Company Name: Tutor: Subject: Date: Tables of Contents Introduction 4 Economic Analysis 4 Factors contributing to economic growth in the United States 5 Demand Side Factors Influencing Growth of Aggregate Demand of US 5 Factors affecting aggregate demand of the United States 6 1.Interest Rates 6 2.Consumer Confidence 6 3.Banking Sector 6 4.Value of Exchange Rate 7 Factors that have aided Long Run Economic Growth of the US 7 Factors influencing Long Run Aggregate Supply 8 1.Levels of Infrastructure 8 2.Development of Technology 9 3.Human Capital 9 Industry Analysis 9 Porters Five Forces of Apple Inc. 10 1.Industry Rivalry 11 2.The Bargaining Power of Suppliers 11 3.The Bargaining Power of Buyers 12 4.Threat of New Entrants 12 5. The Threats of Substitutes 12 Competitors 13 Technological Development 14 Economic Factors Affecting the Industry 15 1.Market Size and the Growth Rate 15 2.Number of Rivals 15 3.Supply and Demand Conditions 16 Company Analysis 16 1.Income Statement 16 2.Balance Sheet 17 Company Ratios 19 1.Liquidity Ratios 19 2.Efficiency Ratios 19 3. Profitability Ratios 20 Evaluation of the Financial Condition 20 1.Estimation of Beta 21 Dividend Growth Rate 21 Determine Rate of Return using: 22 1.The Capital Asset Pricing Model 22 Conclusion and Recommendation 22 References 23 Introduction Apple Inc. is one of the companies in the United States listed on a stock exchange. The company deals with the electronics, they manufacture computer hardware, software with innovative and technological sophisticated non-PC products. Currently, the company is among the leading companies in the US market owning more than 10% share market. Reliable sources indicate that the company has a market capitalization of over $ 220 billion. This has made the company’s shares to be very attractive to the investors. The Apple Company sees itself as the “mobile device company” in the United States. The annual financial publications ranks the company to be the top in payment of the dividends and other form of returns on investments made in the Apple Company. This report will focus on analysis of the stocks and shares offered by the Apple Company. Furthermore, the report will give the overview of the economic situation and how it affects the operation of the company. Economic Analysis The United States are enjoying a stable economy because of the technological progress. This has affected stock prices positively in various companies such as Apple Company. In general, the economic growth in the United States is due to the stable political situation. The latest research indicates the unemployment rate in the United States is 7.2%. This is a clear indication that the economic level is increasing. The positive economic growth in the United States has caused the investor sentiment and this has resulted in market growth. The Apple Company is currently the market leader because of the attractiveness of its shares and stocks. The company enjoys various elements such as pull market that have improved the competitiveness of the stocks offered by the company. Factors contributing to economic growth in the United States According to Baldwin (2013), the United States are currently experiencing an increase in the real GDP. This reflects the increasing value of goods and services produce in the United States. In order to understand the major factors that have increased the real GDP of the United States, it is essential to analyze various factors affecting economic growth. These factors can be grouped into demand side factors and supply side factors. Demand Side Factors Influencing Growth of Aggregate Demand of US According Prabhu (2013), many people in the United State consume a lot, others are investing while the government is spending on various projects. All these have led to higher economic growth. The diagram reflects the “Aggregate Demand” of the United States Factors affecting aggregate demand of the United States 1. Interest Rates The interest rates in the United States are generally lower. This is essential for the growth of the economy because it motivates people to apply for loans. The Americans have high purchasing power because they can access funds at a lower interest rate. This an opportunity for the Apple company to raise capital through sales of stocks and other type of shares. 2. Consumer Confidence Consumers in the United States are confident because of a stable economy. It is essential for the consumers not to be pessimistic so that they can spend, invest in various securities such as stocks and shares. 3. Banking Sector These are essential institutions that stimulate growth of the economy. Banks are the primary determinant of the economy because they involve in the business of lending finances that are necessary for investments. However, the banks’ activities are regulated by the Federal Reserve Bank. The central banking system in the United States is responsible in setting the rates to be charged by commercial banks when they lend to the public. 4. Value of Exchange Rate This is another element that affects the economy because investors, especially foreigners, considers before making their investment decision. The value of the exchange rate is essential because it affects the rate of returns of investments. However, the united States of America have always enjoyed a stable exchange rate. This has been possible because the country maintained a discipline financial status (Magretta, 2012). Factors that have aided Long Run Economic Growth of the US All the factors that are necessary for the growth of Long Run Aggregate Supply are also essential and responsible for the economic growth in the United States. These factors are critical in the economy because their absence can result to the inflationary situation in the country, and thus affecting the attractiveness of stocks from Apple Company, and other companies in the US. The graph below shows the relationship between the LRAS and AD in relevance to the economic growth of the United States of America. In such situation, the inflation rate is zero percent. Factors influencing Long Run Aggregate Supply 1. Levels of Infrastructure Transport and communication infrastructures are essential elements for the growth of the economy. Without good infrastructure companies such as Apple Company can find it difficult in accessing their market segments. 2. Development of Technology The development of technology is another essential element for the economic growth in the long run. Companies need to adopt technological ways of doing business. Some of these technologies include internet advertising and the use of other social media in connecting with existing and potential customers. 3. Human Capital This will be determined by the level of education, training and the motivation of the employees. Employees are essential elements of the performances in the companies. Increase labor productivity improves the performance of the company because the company will be able to adopt the sophisticated production processes Industry Analysis Researchers indicate that the stock prices this week was down by 10%. The primary cause for this was the opinion given by the analyst and partly due to panic among investors. However, the company still maintains its market leadership. Scientist argues that Apple remains an astonishingly profitable company in the United States. Apple Company has manufactured the latest Smartphones that has shown a remarkable rise in the market share. The company owns more than 51% of the market share for Smartphones. For an effective analysis of the computer industry, it is essential to analyze the industry using the porter’s five forces. This is because it helps in improving one's understanding of the setting and the conditions of such. Porters Five Forces of Apple Inc. This tool “porters’ forces” is essential for the industry analysis because it helps in identifying the new entrances into the industry and the effectiveness of the available barriers. Besides, the analysis is vital in assessing the supplier’s and buyer’s power and the strategies for dealing with the substitute products. Furthermore, these forces are essential in declaring whether the industry is attractive or not. Managers and any other parties who are responsible for the performance of the company need to understand the pulling of these forces. Since we are focusing on the Apple Company, we will streamline the analysis of Apple Company and not entire computer industry. Michael porter provided a forum to reflect how an Apple Company is being influenced by five forces. Managers and the marketers of Apple Company have utilized this Michaels’ tool to better understand the operation of Apple industry. Some of the factors critical elements to be considered are as follows. 1. Industry Rivalry The computer industry is highly competitive because the market is very attractive. Apple Company, however, has managed to remain competitive in the market because of the large market share it owns. The company has a good image and has positioned itself in a way that attracts and wins customers. Lüsted (2012), argues that the company’s suppliers are facing another threat of competition among themselves which can affect the pricing of the items provided by the company, though it affects the company positively. Foxconn is the main supply for the company. It supplies various items such as Apple iPhone, iPads etc. Another supply for the company is Zi-Teng. This is the second biggest supplier of the Apple Company. The Zi-Teng suppliers are currently supplying about 8% of this industry. 2. The Bargaining Power of Suppliers Apply company enjoys soft business because they do not face a threat from the bargaining power of suppliers. Suppliers rely on the Apple Company for their sales, making them not to be that powerful in bargaining power. However, suppliers are benefiting in supplying able company because their policies set by the company are favorable to the suppliers. Some of these conditions include prompt payment, advance payment and many others. This means that the Apple Company guarantees business for its suppliers. 3. The Bargaining Power of Buyers The Apple Company is one of the companies in the United States with the biggest Porter force of its supply chain. This is clearly shown by the massive influence on the revenue of their suppliers. The tech giant is one of the biggest buyers for the company. It purchases more than 40% of the various suppliers’ revenues. This is a clear indication that the simple movement of orders for the Apple Company is likely to cause changes such as moving supplier’s revenue materially. The Apple benefits in this industry because they have the ability to choose the supplier it deems cheaper than the rest. This is essential because the company will be able to ask for the competitive prices for their materials. 4. Threat of New Entrants Some forms of barriers to entry are easily removed when there is a ready market for the goods and services. Apple Company is offering ready market to its suppliers, making it simple for any company to ensure that they deliver the requested components at the expenses of the existing vendor, provide that the items delivered are right. The key barriers are the customers’ loyalty and the strong initial investment costs (Wright, 2012). 5. The Threats of Substitutes The substitute’s products are facing hard time because they are pegged to Apple’s revolutionary nature. Apples can at any time change the type of material they use on their next products making hard for the substitute to survive. Apple Company is always using high quality materials making it expensive for the customers switch to the substitute products. For example, a company like Foxconn Technology Co., Ltd. can find itself in trouble if the Apple tries to switch to another new material in its next products Competitors The company faces various categories of competitors though it depends on the type on the industry being analyzed. The primary competitors in the electronic and technological industry are as follows. These competitors comprise of the following companies Microsoft, Google, Nokia and Dell Company. These companies offer the same products with the Apple Company. Apple Company has been able to maintain its market share despite the high competition in the market. Some of the effective strategies they use to remain competitive in the market include differentiation. The company differentiates its product from that of competitors. This is an effective strategy of surviving a competitive market. Finally, the company is focusing so much on quality. The company makes high quality products that are sure to satisfy the customers’ needs. It is vital to meet the demands of the customers in the market so that they will change and develop a positive attitude towards the company. Apple Company as fought severally to develop customers’ loyalty. This is a competitive advantage to the company. Technological Development The Apple Company is one of the computer and gadget creators in the US today. The company is well known because of its superior product that has filled the entire market. Their products are technically advanced, and it has taken the world by storm ever since they first appeared. The technological development within the company is very important because it has secured a company a large market share. In addition, the technological advancement in the company has perfected the functionality of the hardware and design. According to Goldman (2012), technological advancement in the company has contributed the creation of a wonderful variety of software options that serve the wider needs of the customers in the market. Serving a different market segmentation is a challenge to many companies because the needs of these segments are different. For example, young people are more demanding; their needs are wide and it is essential for the company to serve these needs so that they can maintain these customers. Apple Company is able to satisfy the needs of these customers through the use of technically advanced software in their product. The simple gadget app for Apple Company is installed in the App Store that offers endless possibilities of enhancement. It provides various services to the users of the gadget. It is possible for the user to download anything in the app store. This makes the products of the company to be very competitive in the market. In summary, technological advancement of the products has positioned the company well in the market. It has made the entire market feel satisfy with the products of the Apple Company. Economic Factors Affecting the Industry There are various economic factors affecting the computer industry. These factors include 1. Market Size and the Growth Rate The market size and the growth rate for the Apple Company are excellent. The company frequently advertises their product through the social media so that they can make their products. The company prefers to advertise its products because their frequent changes due to technological development and advancement made on the company’s products. For example, there are frequent improvements of the iPods and the tablets made by the company so that these products can meet the ever growing demand. 2. Number of Rivals Apple Company is facing tough competition in the US market. There are many competitors in the computer and electronic market. The key competitor in the market is the Samsung Company. The Apple is facing serious competition from this company because the Samsung Company is growing at a higher rate especially on the side of Smartphones and the tablets (Cusumano, 2013). Samsung Company has introduced Smartphones such as galaxy note and the galaxy S3, and it is attracting a large portion of the US market. The company is currently a serious threat to the Apple Inc. According to the market research done by the marketers from Apple company, it reveals that the popularity of the Samsung company was growing at a higher rate, and this is threatening the future of Apple Inc. 3. Supply and Demand Conditions Demand in the market is a crucial element for the survival of the Apple Company. It has been a challenge for the company to maintain certain classes of customers because the taste and the preferences. It is evidence that as the population ages the demand of certain product changes. Company Analysis 1. Income Statement 2. Balance Sheet Company Ratios The following are the calculated ratios for the Apple Inc. 1. Liquidity Ratios The liquidity ratios of the Apple Inc. are shown in the table below. 2. Efficiency Ratios It is essential for Apple Company to calculate its efficiency ratios so that the managers can be able to estimate the overhead structure within the company. Furthermore, efficiency ratios can be used to estimate the effectiveness of the company’s assets, as well as how well it manages its liabilities. The table below contains a summarized efficiency ratio for Apple Company 3.  Profitability Ratios The profitability ratios are the essential elements that can be used to measure the effectiveness of Apple Company in running its business. It answers the questions of whether the company is profitable and whether it is worth investing in such company. The calculated ratios for the last two years is summarized the following table. Evaluation of the Financial Condition According to the ratios shown in the profitability, it is evidence that the future of the company is bright. The percentage net margin of the company is a clear indication that the company is in a position to manage its expenses. This is essential because it will increase the liquidity of the company to facilitate payment of interest, and other returns that are earned from investments (Schoemaker, 2012). 1. Estimation of Beta This is the analysis of the risk facing investors who invest in certain companies. It is essential for investors to consider the returns and the likely risk in investing in certain shares. In Apple Company, investors are secure because of the financial stability of the company. The company will be in a position to pay for the dividends and other interests that are entitle to certain classes of investors. The monthly prices for stocks since 2008 t0 2012 is shown in the appendix section. The dividends paid by the company in the month of 2012 are shown in the table below Dividend Growth Rate The dividend growth rate of the stock is likely to increase by 1.5 because the company’s business is favorable. The companies are currently acquiring subsidiary companies as an expansion strategy. This is vital because the share prices are likely to increase because many invested are likely to apply (Hasan, 2012). Ratios has also I indicated the ability of the company to meet various expenses with the available cash within the company. The stock turnover is also a pointing factor that shows the effectiveness of the company. Determine Rate of Return using: 1. The Capital Asset Pricing Model = 8% + 2.5(13% - 8%) + 7.6 = 20.5% The constant growth dividend valuation model = $57.2 Conclusion and Recommendation In conclusion, the economic, industry and company analysis shows that the company has high chances of maintaining its leadership position. This is possible provided the company invests in advertisement and constant improvement of the product quality. The market segment served by the company is so sensitive to technology. There should frequent market research and customers follow up so that the company can know the feedback of the customers concerning their product. My recommendation is to buy the stocks. This is for new customers while the existing customers should hold their current stocks or even buy more. This is because the company is profitable and there is possibility that the returns will increase with time. References Prabhu, V. (2013). ERP case study. Publications Oboulo. com. Baldwin, E. (2013). The Phenomenon Behind the Bite: Altercasting as it Applies to Apple Technology. Cusumano, M. A. (2013). The Apple-Samsung lawsuits. Communications of the ACM, 56 (1), 28- 31. Lüsted, M. A. (2012). Apple: Company and Its Visionary Founder, Steve Jobs. ABDO. Goldman, D. (2012). At $500 billion, Apple is worth more than Poland. CNN Money Tech. Schoemaker, P. J. (2012). How to link strategic vision to core capabilities. Sloan Management. Hasan, M. R. (2012). Apple Inc. -An Analysis. Wright, A. (2012). Analyzing Apple Products. Communications of the ACM, 55 (1), 27-27. Magretta, J. (2012). Michael Porter answers managers' FAQs. Strategy & Leadership, 40 (2), 11-15. Read More